Turning on the money machine

Every asset class needs a well-oiled money machine to provide it with capital so that it may prosper and grow. In Australia, infrastructure burgeoned as an asset class in part because of a law requiring the country’s citizens to put aside a portion of their monthly pay cheques to superannuation funds which, in turn, passed money on to infrastructure managers. The rest, as they say is history.

If history is to repeat itself in the US, a similar source of capital will need to be found. With good reason, managers to date have been eyeing America’s pension funds, a multi-trillion dollar asset base that has, for the better part of 20 years, been a strong backer of infrastructure’s sister asset class, private equity.

However, with so many early adopters of infrastructure allocations getting burned in the aftermath of the credit crisis, US pensions are rightly re-thinking their approach to the asset class – and, increasingly, they’re asking the industry for help.

This summer, the Pension Consulting Alliance (PCA), an investment advisor to some of the largest US pension plans, launched a search for an infrastructure investment manager to design and manage a specialised infrastructure fund for clients that could reach $2 billion in size.

The news came less than two months after an exclusive powwow at Stanford University in California, where senior fiduciaries representing about $1 trillion of Canadian, US, UK, Australian and Middle Eastern institutional assets gathered to brainstorm a way forward for the asset class.

One of the ideas discussed at the meeting was a formal vehicle, whereby pensions would get together, find a manager, aggregate their funds and put them to work on their terms, rather than the manager’s.

The PCA’s request for information from infrastructure managers seems to be based on a very similar idea.

The structure of the fund has yet to be determined, but PCA said that it would include an oversight committee composed of representatives from each pension and would provide each participant an opportunity to opt out of any investments proposed by the manager.

The vehicle would range between $1 billion to $2 billion in size and will be place “particular emphasis” on “creative fee structures”. Read: no 2-and-20 for fees and carry.

Alignment of interest with labour concerns, which are a driving force behind many pensions’ allocation decisions, will be given major consideration as well.

The fund will also have a broader investment mandate than the typical closed-ended private equity fund. PCA said it would be designed to make direct and indirect investments in infrastructure assets as well as publicly-listed infrastructure securities. Some participants in the project would also require the ability to co-invest in assets outside the pooled investment vehicle, PCA said.

All of these requirements indicate what many in the industry have realised already: pensions are looking for more limited partner-friendly terms that are appropriate to the asset class and also fit their long-term investment objectives. By extension, they are also looking for managers that are willing and able to deliver.

This search will continue, as also evidenced by CalPERS’ recent announcement that it has shortlisted four advisors for its nascent infrastructure programme, including PCA, Meketa Investment Group, R.V. Kuhns & Associates and Wilshire Consulting. It was yet another sign that for infrastructure, the money machine in America may be about to switch on in earnest.